Many companies and organizations are continuing to look for ways to reduce their internal cost of operations and overhead. Implementing LEAN manufacturing principles has become a very important concept and one that may help improve overall efficiency of operations, directly impacting bottom line results. This blog is written for those organizations.

February 2012

02/23/2012

Responses from manufacturing firms polled for the Federal Reserve Bank of Philadelphia's Business Outlook Survey suggest that regional manufacturing activity continued to expand in February. The survey's broad indicators for general activity, new orders, and shipments all increased from their readings in January. Firms reported near-steady employment levels but an increase in average work hours. More firms reported higher input prices this month, and a sizable share of firms reported price increases for their own manufactured goods. The survey's broad indicators of future activity fell from levels in recent months but continue to reflect optimism about future manufacturing growth.

Indicators Suggest Continued Expansion

The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, edged higher from a reading 7.3 in January to 10.2, its highest reading since October. The demand for manufactured goods also showed improvement this month: The new orders index was positive for the fifth consecutive month and increased from 6.9 to 11.7. The shipments index also remained positive and increased 9 points. The indexes for both delivery times and unfilled orders recorded slightly positive readings this month, compared with their negative readings in January.

Firms' responses suggest near-steady levels of employment this month. The current employment index, which has been positive for six consecutive months, fell from a reading of 11.6 in January to 1.1 this month, suggesting little overall growth in employment. The percentage of firms reporting an increase in employment (14 percent) was only slighter greater than the percentage reporting decreases (13 percent). Firms reporting a longer workweek (20 percent) outnumbered those reporting a shorter one (10 percent), and the current workweek index increased 5 points.

Input and Output Prices Edge Higher

Indexes for prices paid and prices received both increased this month. Forty-two percent of the firms reported higher prices for inputs this month, up from 35 percent last month. The prices paid index increased 7 points and has now edged higher for four consecutive months. On balance, firms also reported a rise in prices for manufactured goods: More firms reported increases in prices (22 percent) than reported decreases (7 percent). The prices received index increased 4 points, its fourth consecutive increase.

Firms' Outlook Still Optimistic

The future general activity index fell from a reading of 49.0 in January to 33.3 this month. The index, which has increased for five consecutive months, remains at a relatively high level. The indexes for future new orders and shipments paralleled the decline in the future activity index, decreasing 17 points and 19 points, respectively. The future employment index showed improvement, however, increasing 3 points. Firms expecting to increase employment over the next six months (33 percent) outnumbered those expecting to decrease it (11 percent).

Firms were asked about their 2012 capital spending plans. Nearly 36 percent of the firms indicated that total capital spending would be higher this year than in 2011; 23 percent indicated that spending would be lower. Firms that plan to increase capital spending noted that they expect to spend more on noncomputer equipment, software, and computer hardware, and they most frequently cited expected high sales growth, the need for replacement capital, and an improved cash flow or balance-sheet position as the reasons for their increased capital spending plans.

Summary

According to respondents to the February Business Outlook Survey, the region's manufacturing sector continued to grow this month. All of the broad indicators remained positive, with firms reporting a pickup in new orders and shipments. Price pressures were more widespread this month, and more firms also reported higher prices for their own goods. Firms' outlook and employment plans for the next six months remain generally optimistic.

For more information on this survey or to learn more about the manufacturing sector and LEAN, please contact the LEAN Accountants of McKonly and Asbury, LLP.

02/17/2012

In the years since the economic downturn, most companies have pursued quick and easy procurement cost reductions. However, many businesses continue to leave money on the table because transformational change is challenging and imposing. Most organizations know they can reduce costs further, but take shortcuts to implement quick fixes that have little long-term impact. Nevertheless, companies can develop a culture of continuous cost optimization by utilizing a focused organization to plan, execute, and sustain advanced cost-reduction practices.

Even when companies establish a "center-led" strategic sourcing and procurement organization, limitations of effectiveness often arise. These are due to specific issues (like a lack of technical expertise) in the sourcing and procurement organization, limitations (often of negotiation or management expertise) of the business units responsible for contracting goods and services, or a lack of coordination between the two. By combining the knowledge of the sourcing and procurement organization and the insight from the business units, organizations can shift their focus from cost-cutting band-aids to long-term cost structure optimization.

The first step for a company is to establish a new organization focused on driving company-wide cost optimization. This organization must have a senior leader who reports directly to the C-suite, as well as "category teams" to leverage the knowledge and experience of those involved in the daily processes of good and service procurement. Each category team should include a manager, key spenders and support members, transactional members (buyers), and a finance representative to act as an independent "scorekeeper." The team could also include strategic sourcing or procurement staff or other key stakeholders.

The second step is for the new cost optimization organization and its category teams to plan and execute advanced cost optimization practices. The focus should be on rate (or price) reductions, which impact supplier relationships, and usage (or consumption) reductions, which impact internal stakeholders. Leading organizations address these areas with maximum effectiveness using multiple tools and practices, often in the areas of:

Advanced Strategic Sourcing and Category Management Practices such as developing and implementing a formal sourcing strategy.

The final and most critical component is ensuring the savings "stick." Just like how it took you four times of trying a low-carb diet and seeing your ten pound weight loss come grumbling back a month later to realize that it wasn't a "diet" you needed but a "lifestyle change," many cost reduction efforts by organizations never fully come to fruition due to a number of poor practices, controls, and other internal changes. Savings "leakages" are most common in vendor relationships, where inadequate vendor set-up, negligent maintenance of item masters, and too many change orders can erode cost savings. Savings also tend to run away during the procure-to-pay process, often due to insufficient control of purchase requisition and PO approvals and a lack of three-way matching for goods and services. The independent "scorekeeper" is vital to tracking cost savings and reducing the budget line items accordingly, thus preserving the integrity and effectiveness of the program. Many businesses struggle to capture savings and increase operating income. Best practice is to reduce relevant budget accounts with the negotiated savings, then track realization with the suppliers and business units.

By planning, executing, and sustaining advanced cost optimization practices (via a dedicated and focused organization), companies can develop a culture of continuous savings maximization. Organizations willing to invest in establishing world-class cost optimization capabilities, instead of quick fixes, will realize benefits ranging from cost-based competitive advantages to improved gross and operating margins. Plus, no one likes ripping off a band-aid.

02/13/2012

President Obama recently laid out his Blueprint for an America Built to Last during the State of the Union address. His plan contains several proposals that focus on the business sector that are intended to support domestic manufacturing and job creation, and to discourage moving operations overseas and outsourcing. The following is a summary of the proposed reformed package as it pertains to businesses.

Remove tax deductions for shipping jobs overseas and provide new incentives for bringing jobs back to the U.S.

The tax code currently allows companies that move operations overseas to deduct the cost of their moving expenses, which in turn reduces the amount of tax that they pay in the U.S. Under this proposal, moving deductions would be denied when a company transfers its operations to a foreign country. On the other hand, if a company moves its operations back to the U.S. after being abroad, the proposal includes a 20 percent income tax credit for the expenses incurred in moving it back.

Target the domestic production incentive on manufacturers who create jobs here at home and double the deduction for advanced manufacturing.

This proposal looks at reforming the current domestic production activities deduction by more narrowly focusing it on manufacturing activities. For example, it would no longer apply to oil production. Savings would be invested in expanding the deduction for manufacturers and doubling the deduction from 9 percent to 18 percent for advanced manufacturing technologies.

Introduce a new Manufacturing Communities Tax Credit to encourage investments in communities affected by job loss.

A new credit is being proposed for qualified investments that help finance projects in communities that have been impacted by a major job loss event, such as a military base closure or a major employer closing or substantially reducing operations. The credit will provide $2 billion per year in incentives for three years.

The President is proposing to extend tax credits to drive investment in domestic clean energy manufacturing, ensuring new windmills and solar panels will incorporate parts that are produced and assembled in the U.S.

Extend 100 percent expensing of investment in plants and equipment.

100 percent bonus depreciation expensing expired at the end of 2011. This proposal includes a provision to extend the increased deduction for all of 2012 for the cost of investments in qualifying property.

Close the loophole that allows companies to shift profits overseas.

Currently, there are loopholes in the tax system which allows corporations to shift profits overseas from intangible property created in the U.S. The President’s plan proposes closing this loophole.

Make the Research and Experimentation Tax Credit permanent.

The research and experimentation tax credit has always been temporary in nature. This proposal supports making the credit permanent, along with enhancing and simplifying it.

To learn more about the Blueprint for an America Built to Last, please contact the LEAN Accountants of McKonly and Asbury, LLP.

02/02/2012

The 5 Whys is a technique used in the Analyze phase of LEAN environment. The 5 Whys is a great tool that doesn't involve a statistical hypothesis and in many cases can be completed without a data collection plan.

By repeatedly asking the question "Why" (five is a good rule of thumb), you can peel away the layers of symptoms which can lead to the root cause of a problem. Very often the reason for a problem will lead you to another question. Although this technique is called "5 Whys," you may find that you will need to ask the question fewer or more times than five before you find the issue related to a problem.

Determine the relationship between different root causes of a problem.

One of the simplest tools; easy to complete without statistical analysis.

When Is 5 Whys Most Useful?

When problems involve human factors or interactions.

In day-to-day business life; can be used within or without a LEAN project.

How To Complete The 5 Whys1. Write down the specific problem. Writing the issue helps you formalize the problem and describe it completely. It also helps a team focus on the same problem.2. Ask Why the problem happens and write the answer down below the problem.3. If the answer you just provided doesn't identify the root cause of the problem that you wrote down in step 1, ask Why again and write that answer down.4. Loop back to step 3 until the team is in agreement that the problem's root cause is identified. Again, this may take fewer or more times than five Whys.

5 Whys ExamplesProblem Statement: Machine 12 uptime is 50%1. Why does the machine only have 50% uptime? - The operator is cleaning oil from the floor 2 hours per shift.2. Why is the operator cleaning oil from the floor 2 hours a shift? - Valve 623 is leaking.3. Why is valve 623 leaking? - The valve was not rated for the correct pressure .4. Why was the valve not rated for the correct pressure? - The machine was not tested prior to release to manufacturing

5. Why was the machine was not tested prior to release to manufacturing? - There wasn’t a standard that required equipment process checks.

In this case five Whys were required to find out that a non-value added standard for equipment process checks was not being followed.

As you can see, the final Why leads the team to a statement (root cause) that the team can take action upon.

5 Whys And The Fishbone DiagramThe 5 Whys can be used individually or as a part of the fishbone (also known as the cause and effect or Ishikawa) diagram. The fishbone diagram helps you explore all potential or real causes that result in a single defect or failure. Once all inputs are established on the fishbone, you can use the 5 Whys technique to drill down to the root causes.

The 5 Why process is a very valuable tool in the LEAN toolbox. It is simple to use, easy to learn and will identify the root cause of a problem in a clear and concise manner. To learn more about the 5 Why process, Please contact the LEAN Accountants of McKonly and Asbury, LLP.